The release of U.S. inflation data below market expectations has reignited speculation that the Federal Reserve may be moving closer to adopting a less restrictive monetary policy in the months ahead.
The immediate reaction was a weaker U.S. dollar, allowing EUR/USD to climb toward 1.1435. While the market’s initial response appears justified, I believe this rebound should not be interpreted as the beginning of a sustained bullish trend.
Instead, it is more likely a corrective move within a broader medium-term trend that continues to favour the U.S. dollar, particularly as investors balance easing inflation pressures against the U.S. economy’s continued resilience.
In my view, the softer-than-expected Consumer Price Index (CPI) reading should not be seen as definitive evidence that the inflation battle in the United States has been won. The Federal Reserve does not base its policy decisions on a single monthly data release.
Rather, it evaluates a broad range of indicators, including labour market conditions, consumer spending, wage growth, core inflation, and geopolitical risks that could quickly reignite price pressures. As a result, any weakness in the U.S. dollar driven solely by this inflation report could prove temporary, especially if Federal Reserve officials continue to emphasise caution and patience before making any meaningful shift in monetary policy.
Against this backdrop, I believe Federal Reserve Chair Kevin Warsh’s testimony before Congress represents the most significant event for financial markets, potentially carrying even greater weight than the inflation data itself. Investors are not only seeking the Fed’s assessment of current economic conditions but also looking for clearer guidance on whether policymakers are prepared to begin a new cycle of interest rate cuts or maintain restrictive policy for longer.
Should Warsh adopt a hawkish tone and reiterate that inflation remains above the Fed’s target while stressing that additional evidence is required before easing policy, the U.S. dollar could quickly regain momentum, placing renewed downward pressure on the euro.
At the same time, the euro continues to face its own structural challenges, limiting its ability to generate sustained gains against the dollar. The Eurozone economy remains weighed down by sluggish growth, while manufacturing activity across several major member states has yet to recover convincingly.
Meanwhile, the European Central Bank continues to pursue a more cautious approach compared with the Federal Reserve. In my opinion, the euro’s recent appreciation has been driven primarily by dollar weakness rather than genuine strength within the European economy, making the rally vulnerable to reversal as U.S. monetary policy expectations evolve.
Geopolitical developments also add another layer of uncertainty to the outlook. U.S. President Donald Trump’s recent remarks regarding the Strait of Hormuz, together with broader concerns surrounding global energy security and maritime shipping, have contributed to higher oil prices and rising U.S. Treasury yields. If energy prices continue to rise, inflationary pressures could re-emerge globally, giving the Federal Reserve another reason to maintain a restrictive policy stance for longer. In my assessment, markets may currently be underestimating this risk, but it could become an increasingly important driver of U.S. dollar pricing in the weeks ahead.
From a technical perspective, I do not believe that trading around the 1.1435 level signals the end of the broader bearish trend that has been developing over recent weeks. EUR/USD remains confined below key resistance levels, and any failure to achieve a sustained breakout above these barriers could gradually restore selling pressure. Consequently, I view the current rebound as an opportunity to reassess short positions rather than the beginning of a long-term bullish reversal, particularly if the dollar regains strength following the Fed Chair’s testimony or stronger-than-expected U.S. economic data.
This does not necessarily imply that the pair will move lower in a straight line. Financial markets are naturally prone to heightened volatility as investor expectations continue to shift. Nevertheless, I remain convinced that the broader trend still favors the U.S. dollar over the euro, as long as the U.S. economy continues to demonstrate greater resilience to elevated interest rates and the Federal Reserve remains firmly committed to its data-dependent approach before considering any reduction in borrowing costs.
Based on these factors, my outlook suggests that EUR/USD may struggle to preserve its recent gains unless new catalysts emerge to support further dollar weakness. Conversely, if the Federal Reserve Chair delivers a more hawkish message than markets currently anticipate, selling pressure is likely to return, opening the door for a gradual decline toward lower price levels. Therefore, I continue to view 1.1200 as a realistic medium-term downside target, even if the pair experiences additional short-term corrective rallies beforehand. In my opinion, this is a period when investors and traders should avoid overreacting to individual economic releases and instead focus on the broader macroeconomic picture, which continues to support the view that the U.S. dollar retains fundamental advantages that could enable it to regain strength against the euro in the months ahead.
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